The interactions between risk management and technology

Advanced Risk Analytics

dkrishna — 2011-04-04T18:28:05+00:00

Some time ago a reader (thank you Tony!) asked me to talk about advanced analytic technology and its use in risk analytics. This unfortunately has taken longer than I would have liked to get to, but has turned out to be fortunate in a peculiar way. Recently and fortuitiously, however, I was approached by Informatica to a discussion with Dr. Ralph Kimball (a prolific author and originator of the Kimball methodology for data warehousing) on big-data analytics (obviously a topic near to my heart - see Big Data and Risk Management). This led to insights on not only the nature of advanced analytic technology but also some interesting discussions on personnel and organizational issues which I will discuss below.

BTW this work has led to a whitepaper by Dr. Kimball that you can find here.

Deep Analytics

Let's first talk about some use-cases that describe the topic of Big-Data Analytics in risk management. Since I feel this topic is more accurately named "Deep Analytics", I will use this term going forward.

Big Data and Risk Management Part 4: Applications

dkrishna — 2011-01-25T15:41:15+00:00

The past two postings on this thread focused on the two Big Data technologies that seem most mature today - Massive Parallel Relational Databases and MapReduce technology, best exemplified by the open-source Hadoop project. I discussed the technologies themselves, and talked about their benefits and drawbacks. In this, the final post of the series, I will address the application of these technologies to risk management.

Big Data and Risk Management Part 2: Relational Databases

dkrishna — 2010-12-27T15:54:03+00:00

In a previous posting, I discussed the dual trends of big data technology and risk management requirements that are rapidly converging. The two most popular types of big-data technology vying for hearts-and-minds today are the so-called "legacy" Relational Database Management Systems (RDBMS) technology and the new-kid-on-the-block - Map-Reduce (MR) technology first developed at Google and embodied in the open-source Hadoop project. This posting will examine RDBMS systems with subsequent posts addressing MR technology.

Big Data and Risk Management Part 3: Map-Reduce Technology

dkrishna — 2010-12-27T15:53:07+00:00

In Part 2 of this series, I discussed the Relational Database systems as a mature technology to store analytic data for risk management. While RDBMS are ubiquitous in this space, there is a technology paradigm shift that is now occurring to Massively Parallel Processing (MPP) databases which is going to offer enormously improvements in scalability and performance. In fact, I predict that MPP databases will largely supplant traditional RDBMS' in the field of risk management data in the coming years.

Big Data and Risk Management

dkrishna — 2010-10-07T03:02:20+00:00

Big Data is now all the rage. Even the Economist has a writeup on the subject. Data, once exclusively the province of quants and geeks, is enjoying visibility in the executive suite like never before. Data has always played an important in risk management. The importance of good data inputs to quantitative techniques has never been in question. This need has been further exacerbated by new risk management and regulatory requirements (Dodd-Frank Act, Basel III etc.).

Exciting change is also occurring on the technology front. In the past 2-3 years a whole new class of open-source big-data manipulation technologies have come of age. These have been driven largely by the needs of dot-com companies to process vast amounts of information being generated from web-site activity, but they are finding new and interesting applications beyond their traditional uses. This class of technologies has been dubbed "Big Data" by the popular press. Driven by the evangelistic fervor of its proponents, the press has taken to making mythical claims about this technology including the imminent demise of traditional database technology.

The Invisible Hand

dkrishna — 2010-08-09T03:42:20+00:00

I recently read a most instructive paper entitled "Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007" by Gary Gorton from Yale. The paper is an attempt to explain the underlying causes of the 2008 market failure. I will do a short summary here, but the paper itself is very readable and I highly recommend it.

Basically, Gorton's premise is that the crash was caused by a run on the shadow banking system. He defines the shadow banking system as one in which wholesale financial market players - banks, securities dealers, asset managers etc. - deposit and borrow large sums of money. This situation is exactly parallel to the way in which individuals (that's you and me) in the real banking economy "lend" money to banks via deposits. The thrust of the article is to show that what happened in 2008 was nothing more than a "run-on-the-bank" that has been seen numerous times, but this time in the harder to understand shadow banking system.

Collaborating on Data

dkrishna — 2010-02-12T01:57:52+00:00

The year has well and truly started, and my other commitments (aka my real job!) are preventing me from devoting as much time to intellectual interests as I would like to spend. In spite of this, however, I did manage to read a couple of papers by Allan Grody where he lays out a compelling vision for a common reference data management utility dubbed the Central Counterparty for Data Management (CCDM) - you can read all about it here and here. Allan is a well-known figure in the industry and has been working on data issues for some time. His basic thesis is that while reference data is expensive to manage and difficult to maintain, hoarding it and specializing in its conformance brings no lasting competitive advantage to any specific financial institution. This is especially true where reference data is critical in enabling the connections between them such as in the settlements process. Therefore he advocates creating a central clearinghouse for reference data which is managed as a cooperative utility by the largest financial institutions.

Systemic Risk and Macro-prudential Regulation

dkrishna — 2010-01-20T11:32:47+00:00

On my recent holiday I took the opportunity to read a few very interesting papers on systemic risk that came out of UK (yes I admit this sounds geeky even to me!). Links to these can be found at the end of the blog, but I want to discuss one, a discussion paper produced by the Bank of England entitled "The role of macroprudential policy", that I found particularly thought-provoking. The paper focuses on how systemic risk can be effectively managed in a global financial system.

Lessons from the Current Crisis

dkrishna — 2009-10-01T12:13:50+00:00

Last week I attended a PRMIA lecture series where we were treated to a fascinating presentation by David Rowe, EVP for Risk Management at Sungard. Entitled "Lessons for Financial Risk Management from the Current Crisis", he presented 5 crucial lessons that we must learn from the debacle of the past few years. Concise and well-presented, the presentation and subsequent panel discussion got me thinking about the technology implications of these lessons.

Utilizing Technology to improve TARP and Financial Oversight

dkrishna — 2009-09-23T13:50:36+00:00

Below is the written testimony that I gave last week for the hearing before the House House Financial Services Subcommittee on Oversight & Investigations regarding the role of technology in improving TARP and Financial Oversight. I focused on the idea that the absence of technology and analytics in financial oversight is more a function of awareness and will than of the suitability and maturity of technology itself. What's more, I argued that the very targets of oversight, the large financial institutions, are themselves enthusiastic users of such technology. Government has much to gain by learning from the private sector in this regard.

For transcripts of the other fascinating testimonials at the hearing, please see here.

Splendid Solitudes

dkrishna — 2009-09-09T00:21:59+00:00

It's been a while since I wrote a post on the blog - an omission that's as inexplicable as it is unforgivable. It will be my endeavor going forward to avoid long absences.

A ray of sunshine on TARP

dkrishna — 2008-12-18T21:44:38+00:00

"Sunshine", Justice Brandeis famously said, "is the best disinfectant". Last week I had the interesting experience of seeing this in action at the hearing of the House Financial Services Committee to consider a report by the Government Accountability Office (GAO) on the Treasury Department’s implementation of TARP (you can see the full hearing on C-SPAN's web-site).

Can Business Intelligence handle the stress?

dkrishna — 2008-11-05T13:48:22+00:00

I recently read an interesting article that asked a provocative question? Could business intelligence (BI) have provided advance notice to the meltdown in the markets (read the article)? The article mostly references two specific technologies: Analytic Tools and so-called Complex Event Processing (CEP) technologies.

Risk Technology and Risk Culture

dkrishna — 2008-10-13T02:18:52+00:00

Since my last column the markets have gotten, if possible, only more interesting. This has naturally prompted some people to write me asking whether better risk management technology alone could really have saved us in this crisis. First let me say that I appreciate the feedback and dialog - keep it coming.

What's tech got to do with it?

dkrishna — 2008-09-20T12:18:20+00:00

This has been an interesting week to say the least - two of the largest investment banks in the world felled by events by seemingly unforeseen circumstances, with a third being brought to the brink; the world's largest insurance company being felled with the same chilling efficiency by the markets. If you're like me, your head must be spinning with the questions.